Market Snapshot: Dow drops 450 points after Fed’s favorite inflation gauge runs hotter than expected

United States

U.S. stocks were slumping Friday afternoon, after the Federal Reserve’s preferred inflation measure came in hotter-than-expected for January.

How stocks are trading
  • The Dow Jones Industrial Average DJIA, -0.97% dropped almost 458 points, or 1.4%, to 32,696.
  • The S&P 500 SPX, -1.14% was down 61 points, or 1.5%, at 3,951.
  • The Nasdaq Composite COMP, -1.85% sank 247 points, or 2.1%, to 11,343.

All three indexes were on track for weekly losses of more than 3%.

What’s driving markets

U.S. stocks were down sharply Friday and heading for weekly losses as concerns over sticky inflation weighed on the market.

The personal-consumption-expenditures price index showed the cost of U.S. goods and services jumped 0.6% in January, according to a Bureau of Economic Analysis report Friday. That was biggest rise since last summer. The year-over-year rate rose to 5.4%, from 5.3% in December, in the first uptick in seven months.

The more closely followed core index, which is the Fed’s preferred inflation measure, also rose 0.6% last month, climbing 4.7% over the past 12 months. Economists polled by The Wall Street Journal had forecast that core PCE prices would rise 0.5% in January and 4.4% year over year.

“The core PCE data was very disappointing,” said Philip Orlando, chief equity market strategist at Federated Hermes, in a phone interview Friday.

It confirms the recent narrative that “inflation is sticky and persistent,” he said, and “it is not coming down nearly as quickly as the immaculate disinflation crowd expected.” That has investors “nervous” that “the Fed may have to get even more aggressive than the ‘Street’ thought just a month or two ago,” said Orlando.

The S&P 500 has fallen around 5% from its 2023 closing high on Feb. 2.

“We think we’re going to grind lower over the next couple of months,” said Orlando. “We could very easily retest the mid-October lows we saw last year.”

Meanwhile, consumer spending rose 1.8% in January, the biggest increase in almost two years. And an index of consumer sentiment rose in early February to a 13-month high of 67. The final reading in February was up from a preliminary 66.4 and from 64.9 in January, the University of Michigan said. 

Such data was seen cementing expectations the Federal Reserve will continue lifting its key interest rate above 5% in its effort to bring down inflation.

“Reaccelerating price pressures coupled with a still-strong labor market that is restoring incomes and is supporting demand will keep the Fed on track to hike rates further over coming meetings, to a peak rate that could be higher than officials expected in December,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note.

Edward Moya, analyst at Oanda, said in a note that “this morning’s data suggest the economy is very resilient and might prompt more bets that the Fed will need to take rates closer to 6.00%.”

The strong job market may make it hard for the U.S. central bank to bring down inflation, according to Fed Governors Philip Jefferson.

“The ongoing imbalance between the supply and demand for labor, combined with
the large share of labor costs in the services sector, suggests that high inflation may come down only slowly,” Jefferson said Friday in a speech at a University of Chicago Booth School of Business conference in New York.

Federated Hermes’s Orlando worries that the U.S. economy is not in decent shape despite the low unemployment rate. He described corporate earnings for the fourth quarter as “a disaster,” with the vast majority of companies reporting lower guidance for full-year 2023. And looking under the hood of the “GDP” data released Feb. 23, Orlando said he worries “the economy is sliding towards recession.”

While revised government figures showed that gross domestic product grew at a 2.7% annual pace in the fourth quarter, Orlando said the “private domestic final sales number” in “the weeds” of the GDP data pointed to an economic slowdown.

In other economic data, sales of new single-family houses in the U.S rose 7.2% in January to a seasonally adjusted annual rate of 670,000, hitting its highest level in 10 months, according to a report Friday from the Commerce Department.

Companies in focus
  • Carvana Co. CVNA, -23.71% said it plans to complete a $ 1 billion reduction in operating costs by the second quarter of 2023 as the online car-sales company seeks to right itself without resorting to layoffs, after it snapped a streak of winning years in 2022. Shares fell almost 24%.
  • Shares of Dow component Boeing Co. BA, -4.12% fell more than 5% as the airplane maker halted deliveries of the 787 Dreamliner. The Federal Aviation Administration said deliveries are temporarily halted as Boeing is conducting additional analysis on a fuselage component.
  • Shares of Open Lending Corp LPRO, -23.12% sank more than 27% to an all-time low Friday after the company swung to an unexpected loss in the fourth quarter.
  • Turning Point Brands Inc.  TPB, +5.32% stock rose more than 5% Friday after the maker of Zig-Zag rolling papers beat its revenue and earnings targets. 

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William Watts and Steve Goldstein contributed reporting to this article